When trading cryptocurrencies, there are many different aspects that traders need to look at in order to make their trading experience profitable and enjoyable.
Volatility, demand, utility, and many other important factors are taken into account by most traders when making decisions as to which crypto to trade with. But there is one very important metric that is connected to almost everything and helps traders see the bigger picture. This is volume or trading volume.
This is a very important metric that can be useful to understand the state of the market at any given moment, but what is it exactly, and why does it matter so much? Continue reading to find answers to these questions.
Simply put, trading volume is the volume of cryptocurrencies that have been traded for the last 24 hours. When calculating this volume, traders can usually take two approaches: calculate the trading volume on the given crypto exchange or across all exchanges. Both of them can be used to determine different things and some traders even calculate both of these volumes to have absolute information.
As we said, volume is the transaction volume for the past 24 hours, but traders are not limited to only this timeframe. Traders can easily calculate the trading volume of any crypto for the past 7 days, 14 days, 30 days, or however many days they wish.
So how do we calculate it? When calculating trading volume, traders look at the total value of the cryptocurrency that has been traded in a given timeframe. So if $10 million worth of Ethereum has been traded on Binance in the past 24 hours, Ethereum would have a $10 million trading volume on Binance. It's as simple as it sounds.
Trading volume is in direct correlation with liquidity, volatility, and demand, three really important metrics of cryptocurrencies. So how are they connected, and how can we use volume in combination with these metrics?
Let's first look at liquidity. Whenever there is high liquidity of any given token on the market, it is relatively easy to trade with this token. But low trading volumes indicate that this specific market or token does not have high liquidity which makes trading with them hard. Let's say that you wish to sell $100,000 worth of Solana on an exchange that has a low Solana trading volume. When you place a sell order, it will take some time for it to fully go through. Since trading volume is low, not many are buying this token and because of that, you might need to sell it for cheaper to attract buyers.
Volatility is another important factor that is associated with trading volume. As we already know, trading volume tells us how many tokens are being traded on the market at any given time frame. So when trading volume is low, it means that there is a small number of tokens that are exchanging hands. Because of that, even one slightly chunky buy or sell order can affect the market. Thus assets with low trading volume tend to be volatile and this can be good or bad depending on how you look at it.
Demand is another factor that is in direct correlation with volume, and it's probably the most important one. Simply put, high trading volume means that there is a huge number of traders on the market actively buying and selling this token. What this means is that there is a demand for this token, which is always good news as more people are on the market, which means a more stable market with good trading opportunities.
"Whenever the price of cryptocurrency is rallying, people start spending a lot more." - Erik Voorhees
Cryptocurrency volume is a metric that is calculated by combining numbers. What this means is that it can be manipulated, and in fact, it is manipulated quite often. Because of this, it is always necessary to approach this subject with a lot of caution, especially if you are not trading on one of the leading exchanges.
One great example of fake volumes is wash trading. This is a process where huge volumes of buy and sell orders are placed at the same time, this causes them to cancel each other out and create fake trading volume, when in fact no significant movement took place on the market. This is commonly done by smaller exchanges to create the illusion that their market has a large amount of trading volume and good liquidity, when in fact it's the complete opposite. Big exchanges also do this, but they usually do this to boost numbers and compete with other big exchanges. The volume that they inflate artificially is usually already quite big, so you should not run into any significant problems.
Another risk associated with trading volumes is the pump-and-dump strategy. Here traders come together to buy a big quantity of one specific token. When this happens trading volume of this token and its price also start to rise. At that time, some innocent traders might see this huge volume and think that this is a good asset to invest in, but then once the price reaches high marks, people who started this pump, will dump all of their tokens to make good profits, leaving other traders to count their losses as prices fall following a huge wave of sales.
So because of this, never look at just trading volume and always look at all other indicators and metrics before making an investment.
Now let's look at an example of volume manipulation. There has been some research done by crypto research firm Messari that studied wash trading and what impact it has on the market. Below we are going to list the top 5 tokens by trading volume in the past 24 hours according to CoinMarketCap, as of September 15.
At first glance, this list might seem genuine as these are top cryptos on the market, but according to Messari this list is wrong. It does not matter when you will look at this list, it will most likely be the same at any given moment. What Messari has learned is that actually in most cases USDT trading volume is inflated, and it usually takes the 3rd or 4th spot on this list, while the king of crypto BTC is almost always at the top. Another interesting finding was that BUSD is never on the actual list of top-traded tokens. But this is not surprising, BUSD is the stablecoin created by Binance, the largest crypto exchange in the world, and it is logical that they would try to inflate the trading volume of their token to make it seem desirable.
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High volume means that an asset has high liquidity and there is a demand for it. These two are generally positive things to have when trading with cryptocurrencies. So yes, it's good to have a high volume of trade. But this volume can also be artificially inflated, so always double-check with other metrics.
Cryptocurrency trading volume gives traders important information that is necessary when making the decision to trade or invest in a specific token. This makes it an important metric that every trader takes into consideration when making decisions.
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